There were so many things going on today with so many threads of discussion that this post will be bag of various goodies to share ideas and get some discussion going.
As always, Friday night request lines are open so leave one or two.
Health Care Will Not Go Away
I want to stay well away from the whole Health Care discussion because of the politics that follows it. When it relates directly to things economic I think it is worth getting into.
Karl Denninger today wrote what I have have been trying to explain to anyone that would listen for some time:
The problem of course is that most pharmaceuticals and many devices have a cost structure that is more than a bit skewed. That is, the first pill may cost $1 billion - in development and testing expenses. Many drugs are "dry holes"; the company spends but the drug proves ineffective or even dangerous, and thus the money is lost.
Subsequent pills may cost $2 each to manufacture - once that first billion is spent.
Obviously, the drug companies must amortize that billion dollar development expense over the projected life and sales cycle for the drug. If they fail to do so they go out of business.
Everyone in the world who has access to that drug gets the benefit of the development. We in The United States get to pay the entire cost, because it is only here that we do not price-control drugs and threaten manufacturers with patent breaks if they don't price "as we like it."
This is responsible for most of the drug and device price inflation we have experienced - we are literally paying for the development of new treatments for more than 6.8 billion people yet there are only 330 million of us in the United States. That is, we bear twenty times our "fair share" of those development costs.
Now all up front I have worked in Biotech/Pharmaceutical research for over 12 years, so whatever bias comes from that you should know.
The reason other countries can play socialized medicine and get price controls on drugs is because the US pays through the nose for it. It is a fact. This stuff is not cheap. I cannot get into how things work, I am sorry, but let's just say experiments are expensive beyond your dreams. This cost must be recouped. Yes, it may cost a company 50 cents to make a pill, but it may have cost 10 billion in development costs to get there.
That all aside, imagine all the socialized medicine programs and what would happen if prescription drug costs went up 500% overnight? Think the Eurozone has trouble now? What would happen is those programs would collapse or price controls the world over would make innovation a thing of the past. Except in recreational drugs as people will need a diversion from having no health care.
There are few things in life where you get what you pay for. I feel drugs and drug research is one. Maybe you do not. The bottom line is that we cannot have Canada Care here because of the damage it would cause on a variety of fronts.
Of course for a preview of what is coming, look to my state of Massachusetts which is enacting price controls on our own socialized medicine program (via Mish):
Health Care Price Controls Hit Massachusetts; Are Doctor Wage Controls Next?
What is pure comedy about this state is the number one employer is of course the state government. Number two is the medical/pharma research field. The punch line is the ultra-lefty folks up here would vote for things which would make them unemployed. It's funny until you want to cry.
The Problem of Savings and How to Separate People from Theirs
There is some kind of sickness inherent in the idea that saving money is a problem. Maybe it is just an economy that is built on no savings at all is a problem. A distinction without a difference?
Some choice quotes from Bill Dudley (Dud?) to share from this Zero Hedge article:
An economic recovery requires that desired investment must rise relative to saving. This has happened recently as fiscal stimulus and an inventory cycle have led to a fall in ex ante saving relative to investment. But for the recovery to strengthen further, this process must continue. There has to be a further demand impulse—be it a decline in household saving rates, a rise in business investment relative to profits, a further expansion of fiscal stimulus or an improvement in the net trade balance via an increase in exports relative to imports.From me to you Bill, bugger off.
You and the FED done enough damage forcing people to chase returns. Never fear, we do have a one outer (poker term):
In addition, the fact that our foreign indebtedness is for the most part denominated in our own currency is a huge advantage in the event the dollar were to come under significant downward pressure. That is because a decline in the dollar would raise the value of the income earned on our foreign direct investment and foreign-currency denominated assets, relative to the income that foreigners earned on their dollar-denominated investments in the United States. All else being equal, this would boost our net investment income balance.
Makes it sound so simple indeed. Just shut up already.
FED Disclosure: As Bad as Thought and More
What should have been the biggest story of the day was instead trumped by the idea that snow induced adjustments and census hiring will push the BLS jobs number to around an 11 million jobs created print on Friday. You can lead a horse to water and all that.
The Federal Reserve, for whatever reason, disclosed some of their Maiden Lane holding in the MBS arena. I think they were under the belief that this would satisfy CONgress (via mab at Illusion of Prosperity) and their staffers because those people are too dumb to know what they are looking at. Of course yours truly is that dumb, so I rely on others for the breakdown! Too bad for the FED some really dialed in folks were checking the goods.
Some reading with content far above what I can provide:
The Federal Reserve's Veil of Secrecy is Being Taken Down, But Slowly
Jesse's Cafe Americain has another wonderful write up. Teaser:
As I recall, the Fed said they were only acquiring 'investment grade' instruments, which would be taken on its balance sheet in support of the US Dollar, in addition to the usual Treasury Debt. The recent exposures of the holdings of Maiden Lane show these to be more like junk bonds, and certainly not as represented.Jesse also has a Robert Reich column posted and you know things are bad if Mr. Reich is singing the same song about lying and lack of transparency!
From Market Ticker:
The FED Admits to Breaking the Law
Mr. Denninger hammers home the explicit charter violation by the FED during the "crisis":
April 1 (Bloomberg) -- After months of litigation and political scrutiny, the Federal Reserve yesterday ended a policy of secrecy over its Bear Stearns Cos. bailout.
In a 4:30 p.m. announcement in a week of congressional recess and religious holidays, the central bank released details of securities bought to aid Bear Stearns’s takeover by JPMorgan Chase & Co. Bloomberg News sued the Fed for that information.
The problem is this: The Fed is not authorized to BUY anything other than those securities that have the full faith and credit of The United States.
In addition Ben Bernanke has repeatedly claimed that these deals would not cost anyone money. But the current value looks differently:
Assets in Maiden Lane II totaled $34.8 billion, according to the Fed, which set their current market value in its weekly balance sheet at $15.3 billion. That means Maiden Lane II assets are worth 44 cents on the dollar, or 44 percent of their face value, according to the Fed.
Maiden Lane III, which has $56 billion of assets at face value, is worth $22.1 billion, or 39 cents on the dollar, according to the Fed’s weekly balance sheet. A similar calculation for the Bear Stearns portfolio couldn’t be made because of outstanding derivatives trades.
In other words, they have lost more than half of their value.
Karl asks what will be done? Let me help, nothing. Still, I love to read reality instead of fiction (unless it's Star Wars).
Finally the big dog. Zero Hedge really gets into things I cannot make input on but can understand in a layman's way:
Why Is The Fed Actively Managing A $25 Billion Maiden Lane MBS Portfolio When Its $2.4 Trillion SOMA Holdings Have A $1 Billion DV01? (And Are Unhedged)
I know, that headline has about 5 things I have never even heard of!
I implore you to read the entire article.
My quick take:
-The FED has lost about 60% on their buys of the worst MBS (like Karl says, outside their charter of assets qualified to buy, but whatever)
-No hedging on interest rates implies low rates for, well, ever, or that the FED never intends to sell these instruments and holds them to maturity. How does that shrink a balance sheet? What about those losses? Hello taxpayer, at least the losses it will be slow!
-The FED is a corrupt mafia-like enterprise in charge of all thing economic; they do what they want when they want and they know nobody can stop them
Calculated Risk Annoys Me
A while ago I removed the Calculated Risk link on the blogroll and I did not really say why. Tonight I am reminded and because I am in a combative mood I thought I would expand on that.
Since CR started I both read the site every day (multiple times) and subscribed to the newsletter. The comments section had such contributors at Tanta, Nova, and some others that really added to the discussion. CR himself would add color as well. All this changed a while ago (I think you can guess about the time). CR became a big site and the comments section became a facebook for financial cohorts.
Which was fine, a great site will grow and I had no problem with that.
All that changed last year. After "The Market Bottom" and a 20% rally from the lows CR wrote a posy which included the snippet that he "went long" at the bottom. What? Any reader of CR knows he never, ever talks about positions. The site is not an investment site per se. Since that time the writing over there has been one of amplifying FED speak, highlighting crap like "rates of change" of what ever, and cheer leading good news.
I had never seen that before from CR and I was disappointed. Later on I tried to engage in a discussion on the comments section and was attacked by people so dumb I do not really participate anymore.
While CR is taking a victory lap after the FED MBS program ended today regarding mortgage spreads:
The spread between mortgage rates and treasuries widened slightly, from Bloomberg: Mortgage-Bond Yields That Guide Loan Rates Rise to 3-Month High.
Fannie Mae’s current-coupon 30-year fixed-rate mortgage bonds climbed 0.05 percentage point to 4.56 percent as of 5 p.m. in New York, the highest since Dec. 28, according to data compiled by Bloomberg.
The difference between yields on Washington-based Fannie Mae’s securities and 10-year Treasuries widened for a third day, rising about 0.01 percentage point to 0.69 percentage point, Bloomberg data show.
That spread reached 0.59 percentage point on March 10, the lowest since at least 1984, as the Fed’s purchases of agency mortgage bonds approached their scheduled conclusion. The gap averaged 1.32 percentage points from 2000 through 2009.
Oh boy, a 10 bps widening from the low! I expect the spread to widen slowly and push up mortgage rates a little (at least the spread between the Ten Year and the 30 Year fixed rate).
Wow, the day after! You are a genius! Congratulations! Before I eat my hat (I did make that bet a while ago about mortgage rates) lets give it more than 24 hours, yes? Please.
Whatever on that. What was even more annoying was the comments section. While maybe people remain from the old days, the rest is populated by snarky time wasters that will brook no divergence from the CR line. An excerpt from my attempt tonight:
EconomicDisconnect (homepage, profile) wrote on Thu, 4/1/2010 - 8:05 pm
Wondering what you thought of the FED MBS asset disclosure? Strong case that those things will never see sale on the open market but be held to maturity. How to shrink that balance sheet in that case? I guess we could wait for their next press release.
daddyo (profile) wrote on Thu, 4/1/2010 - 8:13 pm
They could very easily sell those on the open market in small pieces with minimal impact. Or, they just hold them. They are mortgages, so they will generally amortize and prepay away over time. A very small percent of the overall balance of a 30-year MBS is actually around for 30 years, which is why they trade over 10 year treasuries/swaps.
Ok, total bypass of anything important, but whatever. I try again:
EconomicDisconnect (homepage, profile) wrote on Thu, 4/1/2010 - 8:18 pm
So now the FED balance sheet not only can buy items not allowed by their charter but can hold them for 30 years as a "temporary market assistance program"?. Sooner or later the goalposts get moved so far out that they are in the asteroid belt.
A 10bps widening on rates in one day! At that rate of change (everyones favorite parameter) that does not bode well. Lets check back in after a while and see how things look.
That comment got zero response. Not one. A bit later another player added:
1 currency now -yogi (profile) wrote on Thu, 4/1/2010 - 9:17 pm
Who cares about a few basis points in mortgage rates. You're missing the bigger story, CR.
One thousand, two hundred fifty billion dollars of garbage was purchased by the Fed behind closed doors. Based on their Maiden Lane deals, this probably represents several hundred billion dollars in direct transfer of money from taxpayers to the owners of the garbage, presumably big banks..
Resign, Chairman Bernanke.
End the Fed.
Not bad, along the same lines.
I offered as a caution:
EconomicDisconnect (homepage, profile) wrote (in reply to...) on Thu, 4/1/2010 - 9:23 pmThe comments were all about legal pot.
"Who cares about a few basis points in mortgage rates. You're missing the bigger story, CR.
One thousand, two hundred fifty billion dollars of garbage was purchased by the Fed behind closed doors. Based on their Maiden Lane deals, this probably represents several hundred billion dollars in direct transfer of money from taxpayers to the owners of the garbage, presumably big banks.."
Don't bother yogi,it is all explained away then put on ignore. Back to pot talk.
He tries again:
1 currency now -yogi (profile) wrote on Thu, 4/1/2010 - 9:27 pm
With all due respect, instead of lauding Bernanke our esteemed blogger host should be demanding accountability for the Maiden Lane disaster/theft and transparency for this MBS garbage. Otherwise, he's part of the problem.
A while later a thoughtful, but totally missing the point comment:
some investor guy (profile) wrote (in reply to...) on Thu, 4/1/2010 - 9:29 pm userbarfly wrote:
"excuse my ignorance, but what is the big deal about having the Fed reduce their balance sheet?
they are the "bad bank" of last resort, no?"
Shrinking balance sheets usually means deleveraging. There are an assortment of ways to do it. 1. Let loans or bonds pay off. This is typically a slow process and can happen with no defaults, or a large number. The supply of credit will slowly drop. The amount of money people make for managing loans or MBS portfolios drops. The Fed is doing this for MBS. 2. Unwind the CDOs, TOBs, strips, bond mutual funds, and other bundles of loans, bonds, and derivatives. This is sometimes done in insolvencies. It can also be done by by solvent entities who want to run off a book of business. "Here are the underlying securities. They're yours now." I personally view this as a very underused and useful strategy for dealing with troubled institutions, and investment pools that just look like there isn't much more money to be made managing them. 3. Spin off some operations. A manufacturer might sell a subsidiary. 4. A hedge fund might liquidate most or all of its holdings and give money back to investors.
Another pie in the sky accountant type comment.
The rest is pot related and other boring stuff.
My point; CR is a great news aggregate site and a great place to lift charts, but the commentary and discussion section is a waste of time.
Last night I linked an Automatic Earth entry which was very good. The author, Ilargi, included a video of Bruce Springsteen performing "The Ghost of Tom Joad" from 1995:
A great song and a stellar performance.
It put me in mind of the Rage Against The Machine version of the same tune. I commented:
The version of "Tom Joad" by "Rage Against the Machine" is quite a bit more btiing and powerful in my opinion.
Great intro, as always.
The author responds:
"The version of "Tom Joad" by "Rage Against the Machine" is quite a bit more btiing and powerful in my opinion."
Heavy guitars can easily sound hollow.
This Ilargi's way of dumping on anything and everything I ever say in the comments section over there! Here I thought the blogs were a hive mind of like thought! Wow that one stung!
New poll! Above is Bruce. Below is the Rage Against the Machine (live):
Vote in the new poll as to which tune is more powerful. You know my vote. Unlike others, I will still engage you if you disagree!
A great BBQ site I have been following is "No Excuses BBQ" and enjoy a hilarious "what is BBQ??" twitter thread here:
Have a good night.